Calculation of Bankruptcy Probability Suppose a Linear Probability Model You

question 54

Multiple Choice

Calculation of Bankruptcy Probability Suppose a linear probability model you have developed finds there are two factors influencing the past bankruptcy behavior of firms: the debt ratio and the profit margin.Based on past bankruptcy experience,the linear probability model is estimated as:
PD_i = 0.18 (debt ratio) + 0.35 (profit margin)
You know a particular firm has a debt ratio of 35 percent and a probability of default of 8 percent.Calculate the firm's profit margin.

• A)4.857 percent
• B)8.163 percent
• C)6.53 percent
• D)8.00 percent

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Definitions:

Contingency Planning

The process of preparing for unforeseen events or emergencies in business operations.

Changing Circumstances

Situations that evolve or shift, necessitating adjustments in plans, strategies, or behavior.

Verifiable Work Activities

Activities within a work or project environment that can be measured, observed, and evaluated to ensure they meet predefined standards or goals.

Performance Objectives

are specific goals related to the output or outcome of work, set to evaluate and improve the performance of individuals, teams, or organizations.